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Fiscal Phil – high gag to policy announcements ratio…Budget speech Autumn 2017

24 November 2017 No Comment

For a man better known for his “hawkish-ness” than his humour, the Chancellor wasn’t slow to deliver his first “gag”. Within minutes of taking to the Despatch Box he delivered a mawkish, poorly-worked double-act with Theresa May who ended up waving her cough sweets like Excalibur behind his head. This was like Budget Panto with the pair exchanging props. It didn’t matter; this was fluff of the first order, a performance masking a budget that tinkered with many things but made no major difference to anything…apart from maybe his own employment prospects?

To be honest, it was a pretty terrible gig to get. The economy is flatter than a carpenter’s dream, Brexit is a story without an end (or maybe even a middle) and some even think the first chapter needs rewriting, the previously helpfully compliant OBR have turned against him and his party wanted him sacked. Apart from that, everything smells of roses! Despite such pressure, having little cash to splash and no Commons majority to force through anything even slightly controversial, Hammond made the best of a bad job.

Given the situation he was in, this was a surprisingly “give-away” budget. Not in any big way, but I did find myself asking how he was paying for all the pledges, spending promises and tax changes. Only when I got into the detail did it become obvious that there were a number of “non-speech announced” tax changes and anti-avoidance measures that provide the additional tax take required to pay for the more glitzy headlines.

The Independent said that with all the giveways, “Fiscal Phil had become Handout Hammond” – there was renewed focus on housing, a cash boost for the NHS, investment in teachers, a possible pay rise for nurses, money for scientific research. It was probably a recognition by the Tories of Corbyn’s appeal to the younger generation and the risk of their further demise if they didn’t at least begin to deal with it and the effects of continued austerity. This influence may of course be the closest that Corbyn gets to power but it seems that he has the Tories playing, at least partially, on his pitch.

In response, Jezza himself again proved he is utterly humourless. As he attempted to pick-apart the Chancellor’s statement merely by shouting, he suddenly erupted into that angry-Jez alter-ego. In the most extreme outbreak of Angry-Jez yet witnessed, he almost mounted the Despatch Box as he roared about the Conservatives’ “uncaring, uncouth attitude.” And that is when all Hammond’s crap jokes finally landed.

And so to the (short) detail:

Corporate & business taxes

  • Boost for EIS & VCT investment in knowledge-intensive companies (KICs) – this has been doubled to £10m pa. This, coupled with a relaxation in the age criteria for KICs which mean they measure their age from first attaining turnover of £200k pa rather than first sale means that there is a much expanded opportunity for investment in these companies. The amount individuals can invest each year into EIS companies has been doubled to £2m pa provided that they invest in at least one KIC. This was only the first element of the focus on R&D, knowledge development and science in the budget. To ensure that investment really is aimed at high-growth potential companies, a new “risk to capital” condition has been introduced to disqualify companies where there is a low risk to investors capital.
  • Non-resident companies have long been a focus of ire for the Treasury and this year was no different. Corporation tax will be chargeable on gains on commercial property for the first time and there will be an extension to the tax of gains on residential property. It appears that gains on the disposal of shares in companies holding properties could also be brought into the charge to tax. These changes apply from April 2020 but there are anti-forestalling measures taking effect from 22 November 2017 to stop schemes dodging the change.
  • Business rates – The key change announced was that from 1 April 2018 the indexation of business rates will be based on inflation using the Consumer Price Index (CPI) rather than Retail Price Index (RPI). This was already planned but has been brought forward. Surprisingly, retrospective legislation will be brought in to end the so-called ‘staircase tax’ where different business rates apply depending on whether office staircases are communal or private. Affected businesses will be able to request that bills are recalculated, with backdating to April 2010.
    A £1,000 business rate discount for pubs with a rateable value of up to £100,000 will be extended for a further year from 1 April 2018.
    The next revaluation for business rates is due in 2022. Thereafter, revaluations will take place every three years. This is meant to smooth the previous steps in business rates but may actually accelerate the payment of business rates at higher levels. This is subject to one of the myriad of consultations announced in the budget speech.
  • Increase in R&D relief – From 1 January 2018, the rate of the Research & Development expenditure credit (RDEC) will increase from 11% to 12%, primarily affecting large companies. Furthermore, the Government will introduce a new Advanced Clearance Servicefor RDEC claims.
  • Indexation allowance frozen for companies – The corporate indexation allowance will be frozen from 1 January 2018. No relief will be available
    for inflation after this date for chargeable gains made by companies. The indexation allowance for assets disposed on or after 1 January 2018 will therefore be calculated up to 31 December 2017.
  • For those of you with Enveloped Dwellings, the annual chargeable amounts for the annual tax (ATED) will rise by 3%. The new charges will apply to the 2018/19 chargeable period, which begins on 1 April 2018.
  • For all you electric and LPG fuelled lorry drivers (that’s the lorry fuel not the Yorkie bars) – First year allowances for zero-emission goods vehicles and gas refuelling equipment have been extended for a further three years to 31 March/5 April 2021.
  • There was also a new position paper published on the digital economy – this is aimed at ensuring multi-national group’s profits are taxed in the countries in which the value is generated – we’re looking at you Google, Apple, Amazon, Starbucks etc etc. Unfortunately, this is not a simple issue and will need to be achieved through the OECD Digital Task Force. They’re going to have a go though and the first element of this is to tax multinational groups which hold international property offshore, by extending the scope of withholding tax to royalty payments and payments for certain other rights made to nil or low tax jurisdictions in connection with sales to UK customers. Still with me? This change will take effect from 1 April 2019 and is expected to raise £800m over the first four years.
  • There are new measures to ensure that UK companies only get relief for losses once – surely a pretty basic requirement? They will be required to track the overseas treatment of losses of their overseas branches for double-taxation relief – no wonder they try it on with a name like that!
  • There are what are called “technical amendments” to the rules on Corporate Interest Restrictions. They are all about the treatment of derivatives, R&D interaction with interest relief and public infrastructure exemptions – many of the changes relate to correcting unintended cock-ups created by the first drafts!
  • Listen up! There have been some exciting changes to the “hybrid and other mismatches regime”, if you didn’t know this is designed to “tackle mismatches in tax treatment for entities, permanent establishments and financial instruments.” “The measure introduces a number of
    technical changes. These have been identified after extensive, informal consultation with stakeholders on the regime’s practical impact and
    the extent to which specific rules and conditions might cause results contrary to the original intentions. Consequently, more groups will find
    themselves caught by the hybrid mismatch rules.” Nope, I didn’t get anything either.
  • More anti-avoidance – when claiming a capital loss on the disposal of shares in a group company, previously there was only a need to
    look back six years to identify below market value intra-group transfers of assets and other similar transactions. From 22 November 2017, companies must adjust for all “depreciatory” transactions.
  • In an attempt to extend the life of the UK oil and gas fields, the tax history of late life fields will be able to be transferred on sale so that decommissioning costs can be offset against previous profits.

Personal taxes

  • Personal allowances and tax rates – For the tax year 2018/19 the personal allowance will increase by £350 to £11,850 and the basic rate band will increase by £1,000 to £34,500, meaning individuals will only pay 40% tax once their income is above £46,350. This will result in a tax saving of up to £70 for basic rate taxpayers, £340 for higher rate taxpayers and £250 for 45% taxpayers. Income tax rates are unchanged. Hammond reaffirmed the manifesto commitment to increase the amount at which 40% tax becomes payable to £50,000 by the end of this Parliament. I wonder how many years they think that they have left if the increases are £1k pa?
  • CGT – The CGT annual exemption will increase by £400 for 2018/19. From 6 April 2018 the first £11,700 of gains will, for most individuals, be exempt from CGT. The maximum exemption for most trustees will increase by £200 to £5,850. The rates of CGT will not change.
  • Hammond suspects that rent-a-room relief is being abused…surely not? Currently an individual who rents out a room in their own home to a lodger can claim the relief so that they do not pay any tax on rents of up to £7,500 per year. The Government have “called for evidence on how this is being used in practice”.
  • There were many changes to the treatment of non-doms and trusts – The overall aim of the policy is that any gain made by a non-resident on a disposal of UK immovable (including commercial) property will be chargeable to UK tax. The Government has pointed out that UK tax legislation is out of sync with most other major jurisdictions who already tax the disposal of real property situated in their country. Some of the changes were quite significant and, given the individuals involved, I suspect that the lobbying efforts will be significant!
  • The marriage allowance rules have been amended to allow claims to be submitted by surviving spouses/civil partners for up to four years post-death. The relief is 10% of the unused annual allowance and is worth £230 for 2017/18 but only where the recipient is a basic rate tax payer.
  • Despite continued media speculation about the possible restriction of pension tax relief, Phil confirmed that the lifetime allowance will increase in line with CPI to £1,030,000 for 2018/19. Although this allowance has reduced from £1.8m in 2010/11 to £1m this year, claims can be made to protect against reduction. These are critical claims as exceeding the lifetime allowance can lead to 55% tax charges on the excess when withdrawals are made from schemes.
  • CGT on the sale of residential property – You may remember that this was proposed to start in April 2019? However, the proposed change to the due date for payment of CGT on the sale of UK residential property has been put back by one year. From April 2020, CGT will be payable to HMRC within 30 days of completion. Currently, CGT is due by 31 January following the tax year of disposal. The change will result in the due date for CGT being brought forward by up to 635 days.
  • There has been a change to the rules on “carried interest” which relates mainly to private equity and hedge funds. The change removes some transitional provisions relating to disposals prior to 2015 but paid after 22 November 2017.

Employment taxes

  • Off-payroll working – As widely anticipated, there will be a consultation on extending the off-payroll working rules to the private sector. IR35 is supposedly designed to ensure that an individual who provides their services via an intermediary body (usually a company) but is in effect working as an employee, is taxed as an employee. Significant public sector reform was brought in from April 2017 and they’re keen to extend this to the private sector but only after they “understand the views of the businesses and individuals who would potentially be affected by
    any changes” given the significance of this sector to the “employment” and the economy.
  • Benefits-in-kind – Fuel benefit charges will increase by RPI for 2018/19 onwards. The multiplier for the car fuel benefit charge will rise to £23,400 whilst for vans, the charge will move to £633. The van benefit charge will also increase by RPI from 6 April 2018 to £3,350.
  • Air quality & ‘Lectric cars – there will be no benefit in kind charge if employers provide workplace electric charging points for electric or hybrid vehicles for employees (don’t ask them about charging phones or that might be an issue). There will also be a rise in the diesel supplement used in company car and car fuel benefit calculations. The supplement will increase from 3% to 4% from April 2018 for diesel cars which do not meet the Real Driving Emissions Step 2 (RDE2) standards. Strangely, this supplement will not affect diesel vans or hybrid cars.
  • The NIC bill which was due to be brought in from 6 April 2018 has been delayed by a year – this is due to affect the self-employed, termination payments and sporting testimonials.

Indirect taxes

  • The Government has proposed three measures that will further extend the joint and several liability provisions applying to online marketplaces, such as Amazon or eBay. The new provisions, which are designed to make it more difficult for vendors to evade VAT on goods sold through those marketplaces, will apply from the date of Royal Assent in 2018. The current provisions allow HMRC to make an online marketplace jointly and severally liable for VAT on sales of goods located in the UK that are made by a business established outside the UK.
    These three changes will help to ensure that VAT is being accounted for on all goods sold in the UK. It will also mean that selling online does not offer any VAT advantage over selling on the high street. Marketplaces will need to verify the VAT status of all businesses that trade on them and ensure that they are correctly accounting for VAT.
  • The Government has been consulting on a “split-payments” mechanism which would require an online marketplace to pay the VAT on each sale directly to HMRC and only pay the net price to the business. A split payments model is expected to involve real time extraction of VAT, using payment technology, which would then be deposited with the tax authority. Understandably, this has proven to be a pretty tricksy problem to address but HMRC is being “urged” to speed it  up by the Public Accounts Committee – good luck with that!
  • Another thorny problem is the proposal for a “domestic reverse charge” on the supply of labour in the construction industry which means that the recipient of the labour would account for the VAT due rather than the supplier. They’re aiming for this to be working by 1 October 2019 – given the fact that it’s difficult enough to work out the VAT liability of certain building contracts anyway, I can see some pretty serious issues with a party other than the supplier making decisions on what rate of VAT applies – again, good luck!

Other taxes

  • The mythical rabbit was found in the depths of the milliners garment – With effect from 22 November 2017, first-time buyers paying £300,000 or less for a house will pay no SDLT, and those paying between £300,000 and £500,000 will pay SDLT at 5% on the excess over £300,000. There were immediate rumours about whether SDLT returns which had not been filed due to the 30 days deadline would benefit from the reduction. However, it was announced that the effective date of a property purchase for this purpose will usually be the completion date. Due to devolved legislation this relief will not apply in Scotland and will only apply in Wales until 1 April 2018. It was interesting to see that his buddies in the OBR didn’t share Hammonds enthusiasm for this change saying that they thought that this measure would increase prices by 0.3% and therefore mainly benefit existing property owners.
  • There were some tinkering changes to SDLT to cut out anomalies and clamp down on perceived avoidance.
  • Offshore tax non-compliance – HMRC have extended the time limits that they have to assess additional tax from 4 years to 12 years for non-deliberate errors. This rises to 20 years if the error was deliberate. They now receive data automatically under cross-border information exchanges.
  • The Government has published a new policy paper with the catchy title; ‘Tackling tax avoidance, evasion, and non-compliance’. This summarises measures introduced since 2010 targeting this area with the aim of reducing the ‘tax gap’, and includes new measures which the Government forecasts will raise an additional £4.8bn between now and 2022/23. They also say that they are “committed to tackling the hidden economy” but as they have said this a lot over the past few years we can only assume that they have yet to find it!

And finally:

Mr Hammond gave an interview with The Sunday Times this week, in which he hit out at house builders who are sitting on hundreds of thousands of undeveloped plots of land which have planning permission for new homes. He said: “We are generating planning permissions at a record rate.“It’s builders banking land, it’s speculators hoarding land, it’s local authorities blocking development.” In the Budget speech, he promised action through funding, compulsory purchase and planning controls to deal with land-banking and ensure that planning permission was not “banked” but built through as quickly as possible.

On the Today Programme this morning while being grilled by John Humphrys over the Budget, Hammond was asked about Castlemead Limited, a property company which was co-founded by the Chancellor in 1984 (and in which he is a beneficiary of the trust which controls it), which builds new homes and doctor’s surgeries. The company was granted permission to build four homes in north Wales in June 2010 on the condition work on the site would begin within five years. The Times reports (behind paywall) that the plots are still not developed.

You can’t make this stuff up!

You can get the tax team on the following numbers:
Bernice 01752 203651, Nicola 01752 203600, Belinda 01752 203658


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